What is a lease?

A lease is usually a written agreement between an owner of property (land, building, equipment, vehicle, etc.) and a person or business that will use the property for a stated period of time at a specified series of payments.

The owner of the property is known as the lessor and the person using the property is the lessee.

Some leases are for short periods of time and there is no intention of transferring ownership of the asset in exchange for the rent payments. Two examples of this type of lease are 1) the lease for a one-bedroom apartment covering a 12-month period and rent payments of $1,100 per month, and 2) the lease of a new automobile for 24 months with payments of $300 per month.

Other leases may be for longer periods and ownership of the asset will transfer to the lessee for a small additional payment. An example is a noncancellable lease requiring 60 monthly payments of $600 per month for a forklift truck. At the end of the lease period (after the 60th payment) the lessee may take ownership of the forklift truck for an additional payment of $500.

Since leases are contracts requiring a series of payments, there is a question of how the lease and the related payments should be accounted for by the lessee and the lessor. As of September 2015, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) were close to issuing a common financial accounting reporting standard that will replace the present U.S. accounting rules.